William Gibson - Nollenberger Capital Partners Adam Fischer - Burnham Andy Hargreaves - Pacific Crest Securities Steven R. Becker - Greenway Capital Kevin Hanrahan - KMH Capital Advisors

Good morning, my name is Brandi and I will be your conference operator today. At this time, I would like to welcome everyone to the Digimarc fourth quarter 2008 performance and year end operating results conference call. (Operator Instructions). Mr. Davis, you may begin your conference.

Welcome and good morning. Michael McConnell, our CFO, is with me. We issued a press release earlier today announcing our 2008 results. The objectives of this call are to summarize and comment on these results, review the significant business developments and market conditions, and provide an update on our strategy and operations. This webcast will be archived in the Investor Relations section of our website. Before we proceed, please note that during the course of this call, we will be making forward-looking statements regarding management's opinions and expectations about Digimarc’s business, its markets, and financial performance. These statements are subject to risks, assumptions, uncertainties and changes in circumstances. The actual results may vary materially from those expressed or implied by such statements. For more detailed information about risk factors that may cause actual results to differ from expectations, please see the company's filings with the SEC including our Form 10-K to be filed within the next few days and our earnings release posted on our website. During the course of this call, we will also refer to certain non-GAAP financial measures as defined by the SEC and Regulation G. Definitions of these non-GAAP financial measures and reconciliations of these non-GAAP financial measures to their most directly comparable GAAP financial measures are included in the earnings release for the quarter. The earnings release can be found on the homepage of our website. Any assumptions we offer represent a point-in-time estimate. Given the current economic climate, we believe it is prudent to embrace a very cautious posture toward assumptions in general. We are offering assumptions in this call for the limited purpose of giving you a sense of our planning assumptions and to provide our views to analysts who want to model possible future performance. It is obviously very challenging for anyone to try to forecast the general economy and derivatively its impact on individual businesses like ours. We expressly disclaim any obligation to revise or update any assumptions or other forward-looking statements to reflect events or circumstances that may arise after the date of this call. Mike will begin this update call by commenting on our financial results. I will then discuss our financial and product market outlooks and strategy and operating plans for 2009.

Good morning everyone. I will begin by reminding everyone of the basis of accounting used in presenting our historical financial results. The digital watermarking business that forms the basis of the current new Digimarc was spun out from old Digimarc this past summer just prior to the sale of old Digimarc to L-1 Identity Solutions. As explained in our Form-10 registration statement and to be repeated in our current and future 10-K and 10-Q filings for the next couple of years, the basis of accounting used for the digital watermarking business prior to the spin-off and through August 1, 2008, will be referred to as a carve-out of assets, liabilities, and results of operations from the old Digimarc business that included our ID Systems operations that were sold to L-1. Old Digimarc enjoyed significant financial leverage from a shared services business model in its cost of delivery, engineering, and SG&A operating functions. We previously noted that the financial information in those carve-out financials for the period up through August 1, 2008, don’t include all the expenses that would have been incurred if the digital watermarking business had been a separate publicly reporting entity. We further indicated that initial operating costs in new Digimarc on a standalone basis would be higher than those allocated to digital watermarking business of old Digimarc as we transitioned to a standalone entity. Therefore, the 2008 financial results that we will be discussing today reflect a hybrid financial model that combines the carve-out financial results of our watermarking business through August 1st, and the actual financial results of new Digimarc from August 2nd to the end of the year as well as the non-recurring transition expenses. As a result, except for revenue comparisons, it is difficult to meaningfully compare the new and old financial results due…

Our company is in good shape to weather the global recession, having an experienced stable management team, significant partnerships with leading central banks and Nielsen, a large high quality pattern portfolio, more than a dozen business partners operating under license to our technology, a strong balance sheet with more than $6 of cash and no debt, nearly $60 million of business in backlog, and a high quality, stable and motivated work force. Mindful of the generally high levels of volatility, we developed a conservative business plan for 2009 and we are executing well against it. With all the economic turmoil, we have re-doubled our vigilance of monitoring our product markets for risk and opportunities. We continue to see indications in the IT and media industries that are favorable to broadening adoption of our technology, but it is difficult to assess the effects of the recession on these judgments. I continue to believe that the next step in the natural evolution of computers is for them to learn to better see and hear and understand their surroundings and react to the world around them. I see this as a technological imperative that could be slowed by the recession but not denied. The benefits to society, industry, and the economy of reducing dependence on keyboards and mouse as a means to take advantage of computing power and facilitating broader adoption of computer technology into the fabric of our lives and simplifying the means to gain technological advantages are profound, and we continue to believe that Digimarc’s technology can be a key enabler of this change. Regarding the execution of our strategy, the company’s top objectives during 2009 and as we outlined in our last call are to successfully reposition post spin-off Digimarc in product and financial markets, exceed our financial goals, provide…

(Operator Instructions). Our first question comes from the line of William Gibson with Nollenberger Capital Partners.

Bruce, you talked about what sounds like an extension on digital watermarking in the hearing and seeing technologies, does that also in today’s environment open up the opportunity for an acquisition of may be complementary technologies, are you seeing anything out there along those lines, may be out of the BC community?

There were opportunities, Bill; our view with respect to the private sector, and we’re looking out carefully and continuously, is that given venture funding cycles that we expect there to be a fair number of reasonably good young companies on a starvation diet around mid year; and so, if we see anything we like at this stage, we probably wouldn’t be inclined to act on it for a while because we think prices will improve, but I think at the second half of the year, there are going to be opportunities that deserve scrutiny in the private sector for technology acquisitions.

Okay, and then just one last question; you talked about the foundational work for new potential partners, does that include some of these consortiums of people that are acquiring patents for groups or companies?

The statement in the script doesn’t specifically refer to them but more to business partners akin to what we already have that would foster a development and delivery of products and services. Those guys as you know hopefully are aware of us, and will gain further insight, study this more and recognize the value in our very large and timely intellectual property, but when I talk of partners there, I’m really talking about adding more licensees who are operating companies.

Our next question comes from the line of Adam Fischer with Burnham.

Just kind of on the revenues, you talked the last quarter about baseline of $17 million of book revenue going to the year, is that right?

That’s right. Out of our backlog, obviously the plan includes about $17.5 million that rolled into 2009.

And then today you talked about kind of revenues rolling versus last year year-over-year, did I hear that correctly?

What we clarified today was revenues for the first quarter would be similar to what they were in the fourth quarter of ’08, but we would see increasing revenues in the balance of the year over the first quarter run rate.

Okay, so we should essentially pass our 2008 revenues?

Well, if you would extrapolate the Q4 actual revenues and add to that some increasing numbers for the balance of the year, one could summarize as possible.

Can you just give us an update, Bruce, on our positioning in Blu-Ray, our positioning in Digital Cinema, and may be anything that may have come out in Nielsen since we last spoke?

First, with respect to Blu-Ray, we continue to wait for a word on the publication of the final license. So, the manufacturers in studios who are participating are still operating under the interim license. Those that are participating are identified, I believe, on the Verance website, that is, verance.com. Verance is a solution provider that was chosen for Blu-Ray and they published logos of a number of companies they say are licensees of theirs, and Verance is a licensee of ours; so our income from that sector would be derivative of the Verance revenues. With respect to Digital Cinema, digital watermarking is a required element of all servers for all theaters that are converting to digital and we have an established licensing program and we have four licensees who are suppliers of the relevant technology to the theatrical build-out; so, we’re generating income from that. The pace and level of the income trends is governed by the capital deployment associated with Digital Cinema and obviously that’s probably going to be slower than; it might have been but I frankly don’t know personally what the pace of deployment is there, if it has changed at all. It appears to continue to move forward and as far as I know it hasn’t been substantially ramped back, but I don’t know enough of the details of the many players who are involved in that build-out to provide you with a very detailed view on it. So, it’s going along, everyone is licensed the program as well as established the wall marking as required. So, from a licensing perspective, mature set of relationships. With respect to Nielsen, we continue to work with them on our joint development efforts and I continue to believe and believe all the more strongly as I’ve observed the changes in the media industry that are occurring that we can provide very significant long-term value to Nielsen and the use of our technology and the way in which we’re working with them to deploy it.

How have you factored in any Blu-Ray revenue for the year?

Modestly, yes.

Everything about our plan for ’09 is pretty cautious here and I think suitably so not because of my view about our value or our operations but more the context in which we’re operating and that’s why as we talk about ’09 we felt we could give you some sense of what our assumptions are, but there’s a great deal of uncertainty in the general marketplace here. We watch it every day and we’re ready to adjust if we need to, up or down, but as much said thus far, a couple of months into the year, we’re doing what we thought we’d be doing. So far, so good.

Your next question comes from the line of Andy Hargreaves from Pacific Crest Securities.

Just wondering on the partnerships you alluded to going after; can you give us any more detail in terms of, I don’t expect you to give names, but any specific industries or the areas within those industries that you think are potentially offering the most fertile opportunities?

Well, as you say, it would be inappropriate to identify anyone at this point in time particularly, but in general as our portfolio continues to grow and mature in terms of applications churning into IP, we see a broadening reach and relevance to that asset. So, there are many companies now around the world who are beginning to engage more fully in content identification and then the use of what we call intrinsic identification, watermarking being we believe the primary means of doing that in the future, but also in the core of our IP, as becoming increasingly relevant, and so the partners would be those who are inherent identification and content to deliver value to their customers. So, it can go across a broad range of industries, and we focus mostly at this point in time in the entertainment industry. So, these would be suppliers who operate mostly in media and entertainment in ’09, but as you know we also have done expanding our government business and this year we’re enjoying quite a good performance in the government sector and actually one of the areas of greatest comfort in our business in ’09 because the commercial sector is subject to, we believe, significantly higher risk from the volatility and recession than the government operations that we support. Our work as you know is mostly in international and national security areas and we do not expect those budgets to be reduced.

On the entertainment side at least would you expect the deals that you’re going after to be more heavily weighted towards licensing than the existing business?

It’s a little hard to tell. We’re pretty transparent about our business style here. We don’t like to merely tax someone for the IP. We prefer to find a way to work together to help our business partner to create additional value from which then they give us a little share and so we’re always open in every new relationship to talking about ways in which we can collaborate to help the business partner to grow in ways that increase their profits so that we’re not merely a taxing authority here, but really value creator. Obviously, the reason that you can get royalties from patents is that the innovation there has created value for the business partner, but we’d like to go beyond that and talk about ways in which we could work together if they need our help to build more technology. It can be a services and license arrangement, it could be merely a license arrangements; this is prospecting, so it’s all quite green field at this stage.

Mike, just excluding the extra expenses that may be associated with going after particular customers, would you expect the expenses through the year to be relatively linear?

They really are other than first quarter is generally a bit higher than most quarters just because that’s when majority of our legal and accounting fees related to annual report 10-K proxy are incurred. So, that’s always a bit higher in that quarter and then they’re relatively flat thereafter.

Your next question comes from the line of Steven Becker with Greenway Capital.

Can you talk a little bit about what’s going on in the music digital rights management space and how you guys could potentially play there?

That’s a fascinating space, it’s one of those that I vaguely allude to in terms of or part of the industry that I think will embrace watermarking ultimately, but I’m not sure how all of this chaos that we find the world in right now will affect the pace of adoption. The music industry has made a significant transition here, actually the second significant transition; the first was when Napster merged and they sued everybody. They obviously invested a lot of money, a lot of time, a lot of political clout and basically failed in their assessment, not mine, and so then their next reaction was, ‘okay, then we’re going to abandon DRM’ and you saw a lot of that in the press. They now believe that they can’t stop people from getting their product and they’ve come to the realization that if there was some way to understand what was going on and identify specific enjoyment of their product that maybe they could build some value as opposed to preventing people from giving access, and that’s where watermarking comes in. Again, it’s a universal intrinsic identifier that can be spotted in all kinds of places, in distribution and playback, and provide information back to the relevant participants in the value chain. So, we think the music industry is getting there. They are understanding that in order to build a business model they have to know what’s going on, they have to then be able to have a good accounting, and if they’ve enabled both of those things, it’s quite easy then to attach marketing services and communication and so forth and build value for the consumers who used to be the guys they were trying to prevent from getting access to their music. So, the music industry association and the leaders of the music industry have been very carefully studying digital watermarking technology for many years. They’ve been using it in limited ways, largely in their business to business distribution of the products and pre-production, and reasonably even, and hoped that they will make broader use, but again, in normal times I’d be a little more confident about when that happens, but it could happen pretty soon. On the other hand it could get deferred. So, we’re very supportive. We have a number of business partners who are supportive of the music industry, and we’re ready to go when they’re ready to go. So that’s one of the areas that I hope will see some positive development in here during 2009.

Would that consolidated development occur with a consortium or is it that the solution would have to be broadly adopted as opposed to being adapted by a single player?

It could go anywhere they’d like it to go. I believe that the major labels and trade associations for the music industry are quite aware of the technology. I think there’s a very supportive environment in the music industry. It’s up to them, obviously one or more of them have to adopt, and so I think once the ball starts rolling it’ll be quite easy for everybody to hop on board. Most television is watermarked and virtually all movies and music are watermarked for pre-release. It’s just not on the general distribution, and so now that digital cinema and Blu-Ray are watermarking, those are a couple of the primary means of digital distribution of movies. Music is the next one to get into the fold here on a little bit broader usage. Our job is to continue to encourage universal encoding, everybody encoding everything at the source, and they can actually redundantly encode it later in distribution, and then build the application base; that’s where the big value comes from. That’s always been my proposition as we’re not looking to quit the game once we get the incoming going, that’s just the beginning of the game, and yet we’ve had to struggle here largely against the IT industry historically to get the encoding done, but I think we’re getting there. I think the reason for my optimism and perhaps the strange optimism in such a gloomy context; I think we’ve got an upside, but I’m very cautious about trying to abdicate that word strongly in the great uncertainty that surrounds us. So, I’m very respectful of the effects that recession or whatever you want to call the environment around can have on adoption of technology.

Can you for a layperson help us to understand exactly how the watermarking would be used in the music context? In other words, obviously the content would be watermarked, but then how; would the player read the watermark, how would you actually track and/or ensure the integrity from there?

The encoding should be done with a fair amount of complexity in the payload. What I mean by that is that the data that they put into the music ought to enable a lot of applications, and so in the discussions we’ve had with the music industry we’ve talked about layers of payload, layers of encoding, and at the most basic layer you would have a cover copyright flag and maybe an adult content flag; those are two important values to the music industry and their customers. The copyright flag then will be read by devices and network nodes and would say, ‘okay, this is somebody’s music,’ that it’s copyrighted music. Once the flag is read what happens then is entirely up to the music industry; all the value chain participants. You would think it would mean somebody should pay somebody, probably; and again, it’s not my call, it’s theirs, but can trigger any application they want to have trigger. The adult flag is pretty easy. It would be used in the context where parents want to filter or young people don’t want to be exposed to content that has a strong adult character to it. At another layer up from that you can facilitate commerce; that is you could say, ‘okay, not only do I know this is copyrighted. I know who originated it and I know who distributed it, and I know what kind of programs and rights are associated with that, and thus I’m going to deliver goods, services, and community in the context in vision or a website or a player,’ and now it says, ‘I know that this is a particular song, maybe it’s a music video or something, and so I’m going to deliver a special on the concert tickets because I have the…

When you say ‘they’ it literally could take the form of a one-off relationship or more likely would have to take the place of some sort of consortium and/or group?

The leadership of the music industry still resides in what are called the major labels. So the ‘they’ is them, and the supply chain is among our business partners, I’m not going to be more specific than that.

But in other words, could you create a relationship with a label or would it have to be with all of the labels?

One or more, again, it’s up to them; anywhere they want to go will be fine. The trade association can be helpful to its members and has been helpful over the years in studying new technologies including ones like ours. So, that’s one of the general functions of trade associations so that all of the members get educated and then it’s an individual company decision whether to invest and move forward.

Your next question comes from the line of Kevin Hanrahan with KMH Capital Advisors.

Mike, you said that the cash would go down a little bit at the end of the year due to some payables that you had associated with carving out the ID business that you sold. Is that all done? Should we expect that going forward it won’t be an impact anymore?

That is pretty much done. There’s still a couple of hundred thousand dollars of lingering and merger related liabilities that will be paid out over the next couple of quarter, but pretty much done at this point in time.

Right, and you mentioned that Nielsen revenues, if you can tell us, is that the first revenues that you’ve actually received from that relationship?

We had received Nielsen revenues in 2007 and actually prior on some other licenses that we had.

And other businesses?

Yes.

There are no further questions at this time. Mr. Davis, do you have any closing remarks?

Thank you everyone. We appreciate your continuing interest and support and we’ll carry on with our plans and you can trust us to continue to be very diligent in trying to understand the environment and meet our investment appropriately. Thank you very much.

Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.